GAS CRISIS & TAPI PROJECT

NUSRAT KHURSHEDI
(feedback@pgeconomist.com)

Feb 6 - 12, 20
12

Natural gas would be the second most important and the fastest growing primary energy source in the world over the next 25 years. It is estimated that by 2020, the world's consumption of natural gas is expected to equal to 4,870 billion cubic meters (bcm), more than double the 1995 level.

The natural gas has become an obvious choice for developing economies because of its economically attractive and environment friendly fuel.

Gas accounts for more than 43 per cent of Pakistan's total energy mix. The country is facing severe shortage of gas.

Punjab produces five per cent of total gas in the country and consumes 45 per cent, Khyber Pakhtunkhwa produces nine per cent and consumes four per cent, Sindh produces 66.6 per cent and consumes 44 per cent and Balochistan produces 19.4 per cent and consumes seven per cent.

The acute shortage of electricity is accompanied by the equally disturbing shortfall of gas. Up to 20 hours of gas load shedding during the winter months has been a common phenomenon in households for the last three to four years. It is estimated that gas shortfall would reach 1.4 bcfd by 2015 and 2.7 bcfd by 2020.

Total 526 wells have been explored over 146,000 sq km's of area, with a success rate of 1:3:7. These wells have provided gas reserves of 45 TCF. Gas production during the last five years rose 62 per cent to over 3.5 BCF/day.

The two gas distribution companies in Pakistan have been investing over $200 million a year to increase the capacity of the existing distribution networks of 60,000 kms. However, still only 18 per cent of the population has access to natural gas.

Total number of vehicles running on CNG reached over 0.5 million, making the country the world's 3rd and Asia's largest consumer of CNG.

The commercial requirement of energy in the country has doubled over the last decade, with the demand for natural gas growing at eight per cent per annum. However, gas discoveries and supply are not keeping pace with the increased demand and therefore the requirement for imported gas has become inevitable. This has given a new dimension to the transnational gas pipeline projects from Qatar, Iran and Turkmenistan.

Turkmenistan has the world's fourth-largest gas reserves and energy-hungry India and Pakistan are both eager to tap this source through the pipeline that would run through the central Asian nation's eastern neighbour Afghanistan.

About 1,735 kilometres of gas pipeline in Turkmenistan-Afghanistan-Pakistan-India project will transport up to 30 billion cubic meters of natural gas annually from South East Turkmenistan to consumers in Afghanistan, Pakistan and India.

Under the deal, Turkmenistan will deliver 1.3 billion cubic feet a day of gas at 69 per cent of the crude oil parity price, which is much lower than the gas rate of 78 per cent of crude price Islamabad agreed to with Tehran under the IP gas pipeline deal.

In Afghanistan, the TAPI will be constructed alongside the highway running from Herat to Kandahar, and then via Quetta and Multan in Pakistan. The final destination of the pipeline will be the Indian town of Fazilka, near the border between Pakistan and India. However, for security reasons, the Asian Development Bank had proposed alternative routes in Afghanistan. One alternative was through Taskepri in Turkmenistan to Shebarghan and then through Balakh, Mazar-i-Sharif, Samangan, Kabul and Jalalabad in Afghanistan, and Peshawar, Nowshera and Islamabad in Pakistan to Lahore in India. Another alternative was a route through Serhetabat, Shindand, Delaram, Kandahar, Quetta, Lora Lai, Dera Ghazi Khan and Multan.

In July 1997, Turkmenistan signed a memorandum of understanding with Afghanistan, Pakistan, and Uzbekistan to build a Central Asia Gas pipeline to carry 0.7 Tcf of natural gas per year via Afghanistan to Pakistan later on to India.

In October 1997, Unocal set up the Central Asian Gas Pipeline (Centgas) consortium to build the pipeline, which would run 900 miles from the Turkmen natural gas deposit at Dauletabad through Kandahar, Afghanistan, and terminate in the Pakistani city of Multan.

However, in June 1998, Russian natural gas giant Gazprom bowed out of the international consortium formed to build the pipeline, and in early August 1998, Unocal announced that Centgas had not secured the financing necessary to begin the work.

On August 22, 1998, Unocal suspended construction plans for the pipeline due to the continuing civil war in Afghanistan and the U.S. missile attacks on suspected terrorist training camps. In April 1999, Pakistan, Turkmenistan and Afghanistan agreed to reactivate the Centgas project, and to ask the Centgas consortium, now led by Saudi Arabia's Delta Oil, to proceed, but continuing fighting in Afghanistan, as well as sanctions imposed by the U.S. and the United Nations on Afghanistan, kept the project on hold.

For some years, the pipeline was considered effectively dead, but with a fragile peace in Afghanistan established and the Taliban removed from power, the idea of a trans-Afghan pipeline has been revived.

Since the Taliban government in Afghanistan was ousted in December 2001 as part of the U.S.-led war on terrorism, this pipeline option has gained some support, but continuing instability in the region may deter potential investors.

The project talks revived when in December 2002 heads of Turkmenistan, Afghanistan and Pakistan signed a fresh memorandum of understanding and allowed Asian Development Bank to sponsor a detailed feasibility study.

Conducted through the British Penspen, the ADB submitted the feasibility study. The United States also supported the project as an alternate to Iranian gas pipeline as India joined talks initially as an observer and then as a formal participating buyer.

In April 2008, Pakistan, India and Afghanistan signed a framework agreement to buy natural gas from Turkmenistan. The inter-governmental agreement on the pipeline was signed in December 2010 in Ashgabat.

ADB has funded the feasibility study of the project but its efforts to broker a deal among parties on pricing issues could not succeed. However, last year in November, in a major breakthrough, Pakistan and Turkmenistan finally achieved a milestone, when they locked a deal on gas pricing.

Finalised at 69 per cent of Brent Crude Parity Price for delivery of natural gas at Pakistan-Afghan border inclusive of eight per cent transit cost, the accord is estimated to provide a saving of about $12 billion over 25-year life of the project on import of 1.365 billion cubic feet per day of gas when compared with equivalent gas quantities at 78 per cent of Iranian gas price.

But, more importantly, it provides an opportunity to Pakistan to utilise price review mechanism clauses in Pakistan-Iran GSPA to seek reduction in gas price from Tehran one year before commencement of the first gas deliveries in December 2014 on the basis of alternate fuel prices.

On top of that, the Pakistan -Turkmen gas deal would have a positive impact on import of about 2,000mw of electricity from Tajikistan and Kazakhstan (1000mw each) to Pakistan as cash-starved Central Asian States compete with each other for opening up their energy resources to the South Asian Region.

As the pipeline will travel nearly 500 kilometres through Afghanistan, so Afghanistan's security remains a major question, especially if the U.S.-led coalition forces and the NATO-led International Security Assistance Force (ISAF) begin to withdraw from that country. Beyond interim security, which could be provided by Provincial Reconstruction Teams (PRTs) under ISAF command, and perhaps air patrols by Afghanistan's future military partners, Kabul needs to extend its legal and physical authority throughout the pipeline route.

Along this, unfortunately, security concerns extend beyond Afghanistan. If the route through western Afghanistan emerges as the best option, the pipeline would cross Pakistan's Balochistan province.

Past few years, on and off, a little-known separatist group attacked continuously in gas storage facility in Balochistan. The attack was not unique, as local tribesmen increasingly are targeting natural gas facilities in the province to settle accounts with the central government, ask for higher royalties, or promote their nationalist agendas. The internal security condition makes the future of the project in doldrums.

However, time now comes when government should take bold measures for implementing this project. Pakistan's economy already suffered a lot, especially the industrial and commercial sectors have also been severely affected by the problem. The shortfall of gas and electricity has forced a large number of industries and small and medium enterprises to close down. According to the official statistics, the problem has resulted in the loss of more than 400,000 jobs and is inflicting on the industrial sector alone an annual loss of over Rs220bn.

The gas shortage in conjunction with electricity scarcity has driven households into a situation where taxpaying citizens have to undergo hardships for fundamental needs including light, water and gas to prepare food.

The progress on the pipeline would have far reaching impact on Pakistan's economy that is currently facing over 40 per cent of electricity shortage in peak demand and over 30 per cent shortage in gas supplies in peak winter. The gas projects will create linkages, interdependence and promote people to people contact which would help improve ties and strengthen regional cooperation.